In this article, Baker Tilly Baltics leading tax advisory expert, Anna Vilka, analyzes the difference between using an item for advertising purposes and presenting it independently as part of a representational event.
Taxes from a Normative acts perspective
According to Article 1 of the Advertising Law, advertising is any form or type of communication or event related to economic or professional activity aimed at promoting the popularity or demand for goods or services (including real estate, rights, and obligations). In accordance with Article 8, Paragraph 6 of the CIT Law, expenses for representation include:
- Expenses for building and maintaining prestige at a socially acceptable standard;
- Expenses for hosting business partners and conduct of meals;
- Items of insignificant value (up to 20 euros) bearing the company’s logo and distributed for promotional purposes.
Meanwhile, according to Article 8, paragraph 7 of the CIT Law, advertising expenses include:
- Expenses for creating and placing a brand (e.g., logo design costs, media advertising, etc.);
- Items bearing the company’s logo, attached to goods to promote demand, with a value:
-Not exceeding 70 euros,
-Exceeding 70 euros but not more than 5% of the value of the advertised product during a campaign;
- Gift cards issued by the company, offered in a public advertising campaign, and usable only at the company’s sales or service locations.
The Government Regulation No. 677 “Rules for Applying the Provisions of the Corporate Income Tax Law,” Article 67, supplement the above by stating that if expenses for a public advertising campaign meet the requirements of Article 8, paragraph 7, points 2 and 3, they are considered related to economic activity, and items or gift cards attached to the product are not required to be identified as such recipients.
When items of insignificant value (up to 20 euros) are used for advertising or representation purposes, the economic nature of the transaction must be assessed, clearly separating the advertising event from the representation event.
Advertising activities and tax implications
According to Regulation No. 677, Articles 67 and 68, expenses related to economic activity also include:
- Prizes or rewards with a value not exceeding 20 euros, won, drawn, or gifted for advertising purposes in competitions organized by the economic operator and advertised in mass media;
- prizes valued at up to 20 euros in other legal entities' public competitions where the event location features the operator’s advertising, and the competitions are aimed at expanding the sales market—participation is conditioned only on purchasing the relevant product or service or answering a question;
- prizes awarded in lotteries organized by the company under the Law on Lotteries of Goods and Services.
Article No. 68 of the Regulation No. 677, states that when items of insignificant value (up to 20 euros) or the company’s gift cards (also up to 20 euros) are used for advertising or representation purposes, the economic nature of the transaction must be assessed, clearly separating the advertising event from the representation event. If such an item is presented to the customer during an advertising campaign without violating the restrictions of Article 8, paragraph 7 of the CIT Law, it can be recognized as an advertising expense.
If the item’s value does not exceed 20 euros, the recipient’s identity does not need to be established. If the value exceeds 20 euros, it is no longer considered insignificant, and such expenses are not recognized as related to economic activity unless the recipient's identity is established and income tax paid.
Summarizing the applicable regulatory framework, it can be concluded that both the actual nature of the transaction or event and the value of the used item are essential factors in tax application.
Practical examples
If an item is added to a service or is provided independently, there are several possible scenarios that may affect the tax application procedure.
Example 1: advertising campaign - bundled promotional item
As part of a public advertising campaign, in order to promote the sale of a service, a company adds a thermal mug with the company's brand worth 10 EUR to the purchase of a specific service, presenting it as a set. The item is tied to the purchase of a specific service, therefore the added thermal mug is considered a company promotional measure (Article 8, Paragraph 7, Clause 2, Subparagraph a) of the CIT Law).
The value of the thermal mug is comparable in economic essence to a discount granted for a service, and the buyer of the service does not receive income by receiving this item together with the service.
In accordance with paragraph 157 of Cabinet Regulation No. 17 “Procedure for the Application of the Provisions of the Value Added Tax Law and Certain Requirements for the Payment and Administration of Value Added Tax”, a VAT payer, when providing economic activity, is entitled to deduct VAT in full as input tax for expenses related to a public advertising campaign, if this tax is indicated on the tax invoice for goods and services purchased for the purpose of carrying out advertising activities.
There are no restrictions on the deduction of input tax for entertainment expenses; therefore, regardless of whether the 5% limit specified in the CIT Law has been exceeded, 40% of the VAT amount shall be deducted as input tax.
Example 2: advertising prize - social media campaign
A company organizes an advertising campaign or contest on social networks, within which customers who purchase the company's services within a certain period of time have the opportunity to win a thermal mug with the company's brand worth 10 EUR.
In this case, the value of the prize (item) is also of great importance, whether it exceeds the threshold of a low-value item. Taking into account that the value of the thermal mug does not exceed 20 EUR, the relevant expenses qualify as expenses related to the advertising campaign. Consequently, they are not included in the taxable base for corporate income tax (CIT), nor are they considered as the client's income.
Similar to the previous example, if the advertising campaign is implemented within the framework of the taxable economic activity of the VAT payer, VAT on these expenses may be deducted as input tax in full in accordance with the provisions of the Value Added Tax Law (VAT Law).
Example 3: representation event - gifted item
A company has given its customers a thermal mug with the company's brand as part of a representative event.
In this case, these are representation expenses for the taxpayer, and the total value of the thermal mugs issued to customers constitutes an object subject to CIT (except for the amount specified in Article 8, Paragraph 2, Clause 7 of the CIT Law - if these expenses, together with personnel sustainability expenses in the reporting year, do not exceed 5% of the total gross salary calculated for employees in the previous reporting year, for which state social insurance payments have been paid). The aforementioned expenses must be recorded separately from other expenses.
In this case too, it is not necessary to identify the natural person receiving the representational item, as the thermal mug qualifies as a low-value item (value not exceeding 20 euros). Regarding VAT – if a company incurs representational expenses, that is, representative items are purchased that promote the company or its trademark, in accordance with Section 100 (1) of the VAT Law, input tax on such expenses is partially deductible – in the amount of 40% of the VAT paid.
There are no restrictions on the deduction of input tax for representational expenses, therefore, regardless of whether the 5% limit specified in the CIT Law is exceeded, 40% of the VAT amount is deductible as input tax.
Final thoughts
As can be seen, the application of taxes depends on several factors – the nature of the transaction, the value of the item and the specific context. Therefore, each case must be assessed individually. If the value of the representation or advertising (prize) item exceeds 20 euros, the application of taxes becomes more complicated and requires an in-depth analysis, which is recommended to be carried out separately. The situation is further complicated by the fact that the requirements and application criteria set out in the CIT Law and the VAT Law are not always fully harmonised with each other.
Meet our experts
Tax treatment of representation and advertising expenses can be complex and is often influenced by changing legislation and specific circumstances. Our tax experts at Baker Tilly are here to support you in making informed decisions - whether it’s navigating the nuances of the CIT and VAT laws, evaluating the impact of recent changes, or assessing compliance across jurisdictions.
Would you like to speak with one of our experts or learn more about how we can support your business? Please don’t hesitate to contact us. We’d be happy to explore how our expertise can add value to your operations.
Please note: Tax legislation and regulatory requirements are subject to change. We recommend consulting with your Baker Tilly advisor to assess how current or upcoming changes may affect your business.
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